Analysis and criticism of America's most prominent public intellectual and champion of Keynesian economics. I am part of the Austrian School of Economics, and I critique Krugman's writings from that perspective.

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Monday, March 7, 2011

Say What?

While I set up this blog because of fundamental disagreements I have with Paul Krugman on economics and political economy, nonetheless I did not set it up for the purpose of disagreeing with him. In other words, I don't disagree with Krugman for the sake of disagreement.

More than once, I have read through one of his columns and found myself in agreement (if not total, certainly agreeing with most of what I was reading), but then he comes up with something to which I ask myself, "Say what?" Thus it is today with his column on education: after making some sense, Krugman then gives readers the classic non sequitur.

The column points out that going to college might not provide the automatic financial boost for individuals that it once did, and he gives some examples. Unfortunately, Krugman approaches the entire subject from a purely administrative point of view, as though an economy were something run by a political board of directors.

In fact, most of Krugman's columns and articles do rest upon the viewpoint that an economy is something to be administered by the state, and in that point, it hardly differs from what used to be the case in the former U.S.S.R. and China. The U.S.S.R. used to have the highest per capita ratio of Ph.D.s to the rest of society, but the economic results were less-than-satisfying.

(When I was in graduate school, my math econ teacher, Henry Thompson, once pointed out that the Soviets led the world in developing the application of matrix algebra to solving simultaneous equations in putting together the economic Five-Year Plans. After telling us that fact, he added, "Of course, it didn't do them any good.")

As I read through the column, I realize that Paul Krugman the economist hasn't a clue about the role of entrepreneurship in an economy. None. Instead, we get this:

So if we want a society of broadly shared prosperity, education isn’t the answer — we’ll have to go about building that society directly. We need to restore the bargaining power that labor has lost over the last 30 years, so that ordinary workers as well as superstars have the power to bargain for good wages. We need to guarantee the essentials, above all health care, to every citizen.

In other words, "prosperity" is something that just happens (provided that the government "stimulates" the economy with enough "spending"), and that the government then must ensure that the benefits of a productive economy be spread throughout the population. Furthermore, the process must be one of, frankly, coercion. We must force employers to pay more, we must force taxpayers to purchase medical services for others, and so on.

In other words, in Krugman's view, an economy is something that is administered, supported by government spending and monetary creation, and everything forced upon others either through outright violence or threats of violence and property confiscation. Not once in any of his columns have I read anything that even was close to recognizing that entrepreneurship is the key to a growing economy.

Instead, Krugman seems to believe that an economy just "happens," and that the role of government is to keep the perpetual motion machine running. To be honest, there is nothing in his viewpoint that would be any different than what was done in the U.S.S.R. during the communist era. Education, then, is nothing more than a mechanism to put people in certain predetermined slots in which they would receive an income because, well, they are supposed to receive an income. There is no matching of any position with what contribution it actually makes to that thing called an economy.

(Actually, in Krugman's view, the usefulness of any position is in how much the person employed spends on goods. Likewise, the usefulness of capital is the spending required to create it. Spending, spending, spending.)

I also would add that Paul Krugman really would have no way of explaining why it was that the Soviet economy was primitive compared to what existed in the West. And we should not be surprised, given that one of his most important mentors, Paul Samuelson, actually believed that communism and central economic planning someday would result in a Soviet economy that would be more productive and prosperous than that in this country.

In the end, there really is no difference between MIT economics and what existed in the U.S.S.R. Everything either is administered or simply happens. All production functions are known, and all that is needed is for administrators to act according to "efficient" means. We see how well that worked in the Soviet Union.

Yeah, I wish he could have left it out. However, the way he concludes demonstrates that his view of an economy is purely administrative. My guess is that Krugman (like a lot of MIT econ profs) considers entrepreneurs to be little more than parasites who grow wealthy at the expense of others.

Thanks, Difster. That is a very good commentary, indeed. I remember seeing a news story on a young woman who had majored of Wymens's Studies at Smith, having spent a small fortune to go there, and literally was living out of dumpsters.

Now, not all Wymen's Studies majors at Smith live out of dumpsters, as some go to grad school in order to get graduate degrees in Wymen's Studies and then become adjunct faculty.

Krugman's article is arguing that more education is not the only answer to increased equality. The wage premium for a college degree has remained flat for the past decade.

I think wealth distribution data over the past decade has convincingly shown that freer markets do not increase income equality.

If you want to call actual analysis and interpretation of data "administration" of the economy, so be it. I think it's really constructive to replace it with hollow bromides about "unleashing the American entrepreur" and free market sloganeering.

There is a huge difference between income equality and standard of living. For example, during the Great Depression, the "gaps" between income levels fell, a situation Krugman himself calls "the Great Compression."

Fine. So, the Great Depression is a good thing under such a definition of economic "success."

Now, I agree that over the past decade, things have become worse. However, during that time, the government has waged virtual war on production of goods via environmental, labor, taxation and other regulatory initiatives. Thus, I hardly am surprised when offshoring becomes the item of the day.

Furthermore, much of the activity in finance -- where people earn huge incomes -- has come because of government initiatives in the market. For example, does anyone really believe that without the "Greenspan/Bernanke Put," government guarantees of mortgages, and the other numerous government programs to finance housing and higher education that we would have seen the kind of reckless speculation we saw?

So, Dan, you are correct. I also would bet that officially speaking, income levels in North Korea are much closer together than they are here. According to your viewpoints, North Korea would be a better place to live.

Yeah, they have starvation, people eat grass, lack even rudimentary medical care and the like, but, hey, they have income equality and that is all that matters.

Regarding the “administrative” predisposition in Krugman’s writings; I suspect he is in the Michael Moore camp that wealth, be it money, resources or intellectual, is owned by the collective as a national resource and not individuals. Accordingly we need “really smart” elites to properly manage it.

You seem to consistently want to go to outlandish extremes to make your point. Obviously, no one's goal is to have a society where everyone eats grass...so why set up a straw man N. Korea argument?

If you can respect the idea that some economists prefer to measure welfare not just by productivity and raw GDP, then you might not dismiss Krugman's argument so easily.

From my reading of the data, the US is by far the leader of income inequality as measured by Gini in the developed world. So while an Austrian may site N. Korea as an example of income inequality for a few laughs, a more reasonable person may site much more advanced countries such a Germany, Sweden, Canada, etc.

I think wealth distribution data over the past decade has convincingly shown that freer markets do not increase income equality.

I've made the argument until I'm blue in the face that central bank money dilution is THEFT of purchasing power. The entire Keynesian operation is intended to extract purchasing power and wealth surreptitiously from the non-powerful to the powerful. It has been quite successful in doing that.

Blaming libertarians or the free market for the sins of statism is typical of the cement-headed arguments used invariably by statists. It never ends.

I will also add that like all statists, Krugman sees himself as an essential director in the lives of the mundane just as Prof. Anderson described. Because the essential pricing process necessary for prosperity has no role for the totalitarian-minded statist, the statist will violently and hysterically oppose such essential freedoms.

Note that Krugman’s comparisons last week between unionized Wisconsin and non-union Texas are flawed.

"I've made the argument until I'm blue in the face that central bank money dilution is THEFT of purchasing power."

Boogie boogie, here comes the hyperinflation scare hypesters!

Where do you get this from? Definately not reality. Maybe you should look at how often over the past couple of decades, CPI has peaked above 5%? The fact is that central bank policy has not eroded purchasing power in a long time despite libertarian inflation fantasies.

In fact, overall CPI has decreased significantly since the beginning of the anti-Christ's presidency...imagine that.

AP Lerner has been here schooling you on monetary theory for over a year now and to no avail...sigh

While I appreciate spirited debate and all that, please be careful when making accusations of racial bias against someone else. I think we understand the point that Bob was trying to make.

By the way, one of my children is Hispanic, being from Guatemala. What Bob said was not offensive when one takes into account the fact that a lot of Hispanic children in schools are recent arrivals in the USA.

He was dealing with a Krugman statement that automatically assumed that Texas schools were inferior to schools in Wisconsin. Krugman did not cite any data, just his own prejudices.

Now, feel free to say what you want about me, as I am the one responsible for this blog in the first place. Nonetheless, we need to be careful about the kinds of accusations that are made here.

I don't believe in censorship and welcome all people who make comments, pro and con.

If the Dept. of Education data is being looked at in terms of household income (they use free lunch eligibility), Texas and Wisconsin about tie at the 8th grade level and Wisconsin wins at the 4th grade level. This is among low income students.

I am a facts kinda guy, and will readily admit that these figures are not a ringing endorsement for WI schools over TX.

However, it brings me to the broader point that inequality DOES matter when it comes to educational performance...even the blogger who you linked says this in his post.

With this in mind let's have a look at TX vs. WI based on per capita income:

TX: 36,484 WI: 36,822...very similar...and have grown at a similar rate over time.

Now Gini:

TX: ~47 WI: ~42...not huge, but a significant difference....this, is what explains the overall disparity in student performance...and I would argue that it is directly due to conservative policies in education and elsewhere.

Just to beat a dead horse, if you look worldwide at the countries who beat us on test scores, they all have much lower inequality than the US.

Where do you get this from? Definately not reality. Maybe you should look at how often over the past couple of decades, CPI has peaked above 5%?

Considering the source of CPI measurement, it is no surprise it is a poor indicator of inflation. Furthermore, Austrians argue CPI could be negative in the face of increasing money supply - purchasing power is still being confiscated.

Say the money supply doubles overnight, all things being equal, prices would double.

Say, all factories become twice as efficient, owners could sell at half the price and maintain profit margin, prices stay the same.

Productivity is transferred from the laborer to the politically connected.

Well, LK, the truth is a bit more complicated and insidious than that.

Keynesianism is USSR-lite. People nominally have title to their own property and can enter into contracts etc.... However, the whole purpose of Keynesianism is to allow a significant role for the ruling class in "guiding" the economy to enable significant wealth extraction from the mundanes. That is why the ruling class had a collective orgasm in the 1930s when Keynes first came on the scene. He made irresponsible spending and government looting "scientific". That is the reason for the complete hostility to the Austrians: There is no role for a criminal looting ruling class in the Austrian system.

The theory of aggregated production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state [eines totalen Staates] than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire. This is one of the reasons that justifies the fact that I call my theory a general theory.

About Me

I teach economics at Frostburg State University in Frostburg, Maryland. We are located on the Allegheny Plateau, and we have cool summers and tough winters.
I am the single father of five children, four of them adopted from overseas and I have two grandchildren. My family and I are members of Faith Presbyterian Church (PCA).